The court's president, Lord Neuberger, said that decisions over the years by the European Court of Human Rights meant that it could now be possible to argue that the previous regime was incompatible with the right to a fair trial enshrined in the European Convention on Human Rights (ECHR). If this was the case it could have "very serious consequences for the government", as those affected could make a claim for compensation, he said.
Lord Neuberger said that it would be "wrong" for the Supreme Court to decide on the point without the government having had the opportunity to state its case before the court. However the unsuccessful parties in this case were entitled to a further hearing. As to how the case should proceed, it would be for the Court of Appeal, or even the High Court trial judge, to consider the issue first; including any relevant interveners "after the appropriate notice has been given to the attorney general and the secretary of state for justice", he said.
The Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) introduced a new civil court costs and funding regime from 1 April 2013. Changes made by LASPO, following the recommendations of Lord Justice Jackson in his review of civil litigation in England and Wales, included ending the practice of allowing the successful party in a civil case to recover their lawyers' CFA success fees and after the event (ATE) insurance premiums from the unsuccessful party; save for very limited exceptions, and for CFAs and ATE policies entered into prior to 1 April 2013.
Legal costs expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that Lord Neuberger was right to raise the point that a future challenge could have very serious financial consequences for the government.
"However, it is ironic that the ECHR issue and the question of excessive additional liabilities and high base costs is being considered now, after LASPO has come into force, and not in the years when continuous complaints had been aired prior to, during and following the 'Jackson Costs Review'," he said. "LASPO and the proportionality requirements in the new costs regime were introduced explicitly to address this point, so it is strange that it has not been until now that the courts have picked up on this ECHR point."
The Supreme Court's judgment related to a nuisance claim brought by two individuals against the operators of a speedway track under the previous costs regime. The residents had been successful in the High Court before the decision was overturned by the Court of Appeal, and then restored by the Supreme Court earlier this year. The operators of the track were ordered to pay £10,350 each in damages, and 60% of the residents' costs.
The judge said that the costs in this case, which broke down into three distinct parts, were "very disturbing". As well as being liable for 60% of the residents' base costs, charged by their lawyers in the traditional way, they were also liable for 60% of the lawyers' CFA success fee and 60% of the ATE premium. The costs of the High Court case alone was £398,000 in base costs, a £319,000 success fee and an ATE premium of around £350,000; of which the losing party was liable for over £640,000 in total.
"These figures … give rise to grave concern even if one ignores the success fee and ATE premium," Lord Neuberger said in his judgment. "The fact that it can cost two citizens £400,000 in legal fees and disbursements to establish and enforce the right to live in peace in their home is on any view highly regrettable."
"The point can equally forcefully be made from the point of view of the respondents. As relatively small business operators, they are not only having to fund their own costs, which presumably would be of the same order, but in addition they are going to have to pay some £240,000 towards the appellants' costs. It is true that the respondents lost, but they were seeking to defend their businesses and they plainly had a reasonable case, as is evidenced by the fact that they won in the Court of Appeal," he said.
Lord Neuberger said that there had been "a number of unique and regrettable features" in the previous regime, including the fact that proportionality was only a feature of a base costs award and could not be taken into account in relation to recoverability of the success fee and ATE premium. Part of the losing party's argument turned on the fact that the 1998 Human Rights Act requires the court to "exercise its discretion" when awarding costs, unless otherwise required by primary legislation.